Case study: The future of biodiversity
Five trends that will shape the discussion of biodiversity and natural capital in the coming years.
For many years, the attention of ESG investors has focused on climate change and reducing carbon emissions. Yet a shift in focus is underway towards the natural world and how businesses can measure and reduce their impact on biodiversity.
As biodiversity becomes more prominent, there are several themes that investors and businesses need to be aware of.
As biodiversity becomes more prominent, there are several themes that investors and businesses need to be aware of.
Data standardisation
One of the key challenges facing businesses trying to analyse their impact on the natural world is data. There’s a vast amount of data to be tapped into, but little standardisation in how it’s used or disclosed.
For example, the location and use of natural capital has an impact on its value. As Ann Meoni, Senior Responsible Investment Analyst at abrdn, explains: “Using a hundred cubic meters of water in Scotland is very different from using a hundred cubic meters of water in Egypt. Likewise, deforesting a commercial forest area has a different impact to the deforestation of a pristine forest.”
Efforts to fix this and ensure common standards are underway. The UN is developing its System of Environmental-Economic Accounting (SEEA) framework to integrate “economic, environmental and social data into a single, coherent framework for holistic decision-making”. In addition, there are initiatives like the Natural Capital Protocol that aim to help businesses better understand their impact on the natural world.
For example, the location and use of natural capital has an impact on its value. As Ann Meoni, Senior Responsible Investment Analyst at abrdn, explains: “Using a hundred cubic meters of water in Scotland is very different from using a hundred cubic meters of water in Egypt. Likewise, deforesting a commercial forest area has a different impact to the deforestation of a pristine forest.”
Efforts to fix this and ensure common standards are underway. The UN is developing its System of Environmental-Economic Accounting (SEEA) framework to integrate “economic, environmental and social data into a single, coherent framework for holistic decision-making”. In addition, there are initiatives like the Natural Capital Protocol that aim to help businesses better understand their impact on the natural world.
Taking centre stage
While the focus of policymakers and ESG specialists has been on climate change for years, biodiversity and how to value it is beginning to take centre stage.
There is recognition that the degradation of nature is reducing the planets capacity to provide many of the ecosystem services we depend on. This compounds climate change, threatens food security, reduces water accessibility and quality, increases spread of disease and more.
Policymakers and businesses are now making ambitious commitments to addressing biodiversity decline. At the UN Biodiversity Conference (COP15) in 2022, countries agreed on targets for 2030, including halving the rate of habitat loss, restoring degraded ecosystems, and tackling invasive species. Next year’s COP16 conference in Turkey, aims to further advance global efforts, with a focus on financing biodiversity conservation and strengthening international cooperation.
There is recognition that the degradation of nature is reducing the planets capacity to provide many of the ecosystem services we depend on. This compounds climate change, threatens food security, reduces water accessibility and quality, increases spread of disease and more.
Policymakers and businesses are now making ambitious commitments to addressing biodiversity decline. At the UN Biodiversity Conference (COP15) in 2022, countries agreed on targets for 2030, including halving the rate of habitat loss, restoring degraded ecosystems, and tackling invasive species. Next year’s COP16 conference in Turkey, aims to further advance global efforts, with a focus on financing biodiversity conservation and strengthening international cooperation.
The regulatory landscape
The increased focus on addressing biodiversity loss and ambitious commitments made by governments means several new laws will be brought in over the coming years. These should put pressure on businesses to understand and better manage their dependencies and impacts on the natural world.
In the UK, the new Biodiversity Net Gain guidance, published in February, requires all planning permissions in England to provide a minimum 10% net biodiversity gain. It comes into effect in November 2023.
In addition, the EU's Nature Restoration Law, announced in 2021, aims to restore degraded ecosystems across Europe, setting targets for habitat restoration and species protection. While the law is struggling to get approval, the proposed seven targets contained within it would have a dramatic impact.
In the UK, the new Biodiversity Net Gain guidance, published in February, requires all planning permissions in England to provide a minimum 10% net biodiversity gain. It comes into effect in November 2023.
In addition, the EU's Nature Restoration Law, announced in 2021, aims to restore degraded ecosystems across Europe, setting targets for habitat restoration and species protection. While the law is struggling to get approval, the proposed seven targets contained within it would have a dramatic impact.
These include:
- Reversing the decline of pollinator populations by 2030.
- No net loss of green urban spaces by 2030, a 5% increase by 2050, and a net gain of green space that is integrated to buildings and infrastructure.
- In agricultural ecosystems, ensure an overall increase of biodiversity.
- Restoration and rewetting of drained peatlands under agricultural use and in peat extraction sites.
- In forest ecosystems, ensure an overall increase of
- Restoring marine habitats and restoring the habitats of iconic marine species,
- Removing river barriers so that at least 25,000 km of rivers are turned into free-flowing rivers by 2030.
Then there is the Taskforce on Nature-related Financial Disclosures (TNFD), which is developing an agreed framework for businesses to regularly disclose their impact on the natural world. Several governments have hinted at making this a mandatory reporting requirement.
Finally, last year’s COP15 in Montreal, Canada, culminated in the Global Biodiversity Framework, a landmark agreement that will guide the world towards global action on nature to 2030. Some of the 23 targets that the 188 governments signed up to include restoring 30% of terrestrial and marine ecosystems, halving global food waste, mobilising at least $200bn a year for biodiversity-related funding, and raising at least $30bn in international financial flows from developed to developing countries.
Finally, last year’s COP15 in Montreal, Canada, culminated in the Global Biodiversity Framework, a landmark agreement that will guide the world towards global action on nature to 2030. Some of the 23 targets that the 188 governments signed up to include restoring 30% of terrestrial and marine ecosystems, halving global food waste, mobilising at least $200bn a year for biodiversity-related funding, and raising at least $30bn in international financial flows from developed to developing countries.
Industry impact
For businesses, there will be winners and losers from the increased focus on preventing the degradation of nature..
Companies increasingly recognise that their operations and supply chains depend on healthy ecosystems and biodiversity. And failing to address these issues can result in reputational risks, regulatory challenges, and disruption to their operations.
Several sectors are likely to be significantly impacted for differing reasons. Agriculture and food production relies heavily on ecosystem services, such as pollination and soil fertility. Practices that harm biodiversity, such as deforestation or excessive pesticide use, can lead to reduced crop yields, increased vulnerability to pests, and soil degradation. In addition, costs are likely to rise due to the increased need for fertilisers or pesticides, as well as pollinators.
Similarly, energy companies that operate in ecologically sensitive areas, disrupt natural habitats, and contribute to pollution will face increased regulatory challenges and competition from cleaner alternatives. And with raw materials becoming scarcer and harder to extract, as well as resources like water becoming difficult to access, costs for mining companies are likely to increase considerably.
Companies increasingly recognise that their operations and supply chains depend on healthy ecosystems and biodiversity. And failing to address these issues can result in reputational risks, regulatory challenges, and disruption to their operations.
Several sectors are likely to be significantly impacted for differing reasons. Agriculture and food production relies heavily on ecosystem services, such as pollination and soil fertility. Practices that harm biodiversity, such as deforestation or excessive pesticide use, can lead to reduced crop yields, increased vulnerability to pests, and soil degradation. In addition, costs are likely to rise due to the increased need for fertilisers or pesticides, as well as pollinators.
Similarly, energy companies that operate in ecologically sensitive areas, disrupt natural habitats, and contribute to pollution will face increased regulatory challenges and competition from cleaner alternatives. And with raw materials becoming scarcer and harder to extract, as well as resources like water becoming difficult to access, costs for mining companies are likely to increase considerably.
Active engagement
As attention on biodiversity increases, so too will pressure from investors and consumers on businesses to operate in a way that helps, rather than hinders, the natural world.
Investors have an important role to play in driving this change. By actively engaging with businesses as shareholders, investors can encourage best practice.
At abrdn, engaging with businesses we invest in is an important part of how we operate. We expect these businesses to consider the preservation of natural capital and take a prudent approach towards natural resources. When they don’t have appropriate policies, risk-management systems or clear strategies and targets regarding the preservation of natural capital, we can escalate our concerns through voting.
Investors have an important role to play in driving this change. By actively engaging with businesses as shareholders, investors can encourage best practice.
At abrdn, engaging with businesses we invest in is an important part of how we operate. We expect these businesses to consider the preservation of natural capital and take a prudent approach towards natural resources. When they don’t have appropriate policies, risk-management systems or clear strategies and targets regarding the preservation of natural capital, we can escalate our concerns through voting.
Conclusion
Biodiversity is integral to the future of the planet. Thankfully, businesses and policymakers are increasingly recognising the importance of the natural world. At abrdn, we will continue to drive the conversation forward by engaging, researching, and investing in businesses that seek to generate profits whilst managing their sustainability-related risks.